Is This Example From Savannah Ross Realistic?

[ClintL]

I just listened to a teleseminar by Savannah Ross (Rich Mom) and wondering just how realistic it is. Here are the details;



Bought property (fourplex) at $160 K, 20% down of $32 K and mortgage of $128 K. Cashflows at $1,000/month



Had it quickly re-appraised at $200 K so refinanced with 20% down at $40 K and new mortgage of $160 K. Cashflow decreases to $800/month



[At this point, she even mentioned that at times she can get this property re-appraised in a week - is this possible? Also, can the original mortgage be closed that quickly?]



She pulled $32 K of equity out of this property and said it's almost like she got this for 'free'. Then she used this $32 K as a down payment on a second similar property as the first.



She repeated this process of pulling out $32 K each time to buy a total of four properties.



In a year's time, each of these four properties got re-appraised at $291 K so she refinanced each one with 20% down at $58 K and mortgage of $233 K each. Cashflow on each down to about $570/month. She pulls out $73 K from each one.



She then uses the $73 K pulled from each of the fourplexes and uses it as 20% down payment to buy a property worth $1.4 Million.



Total portfolio now 4 fourplexes at $291 K each plus the $1.4 M one equals over $2.5 M.



These were the numbers from her case. Is this case realistic?

 

[Thomas Beyer]

[quote user=ClintL]Is this case realistic?


I assume this is in the US ?



I'd say that IS possible, perhaps not at that pace, but in certain markets yes.



However, this assumes that rents had to be raised, and that is not possible in many jurisdictions, and even if it is legal then the market and the asset has to support it.



In most cases one has to wonder why the seller wasn't smart enough to raise rents himself ? In most cases an asset with higher rents is nicer, i.e. has been upgraded. That costs money .. and it causes vacancies during the reno period.



Where is this ?



If she is so rich, why is she teaching courses now ?

 

[ClintL]

I think this was a Canadian example. She said $32 K was used in her first purchase. She made no mention of raising rents or any renos. She did say that she funds property purchases solely from pulling out equity.

 

[Thomas Beyer]

[quote user=ClintL]She made no mention of raising rents or any renos.
a 4-plex is evaluted on RENTS .. rents don't go up by magic. They go up because the market and the property supports it. Thus, to get rents up you usually have to upgrade them. Sometimes you get lucky and you get a dumb seller. But that is not a reliable business strategy as sellers of revenue properties, on balance, are not so dumb. Yes, there is the odd one. If you strike 12 times you will find 1-2. But not consistently.



Ask her: why did the properties appraise higher ?

 

[TerryKruse]

I am not sure that the banks would go for the refinancing over such a short time, especially in Canada. They might be willing to go for the first refinancing but would be suspicious of the new appraisal. Canadian banks would be worried about bank fraud.



Most banks would look at the price she paid and say because she paid ($160) this then is the real value. They would question her as to what she did to bring up the value.



Her debt service ratio would also be part of the process, so the bank would look at this before financing new properties as well as any refinancing.



What is not mentioned is that most mortgages have an early payout penalty that can sometimes be substancial. I don't think she is showing all of the numbers.



Perhaps this can be achieved if property values are going up considerably and the economic fundamentals support it, but this scenario would likely take some time to be realistic.



It sounds like a great way to sell courses.



Terry

 

[invst4profit]

I would be inclined to chalk these claims up to artistic license. She may have stretch the scenario by condensing four occurrences spread over a mush longer time frame or possibly the circumstances of multiple investors over a unknown time frame.



The facts may be partially true, although possible, yet through her artistic license in weaving a story have been condensed, contorted or otherwise re interpreted to fit her purpose.

There is probably one or more words used in her presentation to excuse her from any liability in regards to the exact validity of any examples she has provided.

She is selling a dream and in doing so it is always common to entice the dreamers with tales of exploits beyond the norm.





Plausible - yes,

Probable - unlikely.

 

[tonyla]

I think this is what is problematic with success stories in a seminar situation. It lends itself to embellishment and is light on the details. In my mind a situation such as this could only conceivably happen in a very hot market and with very loose credit.



I think the more relevant question is "is this repeatable?" and "is this repeatable by me?". To that I would answer, very unlikely and definitely not in most markets today.

 

[GaryMcGowan]

In my experience the model works but the numbers do not. You will also find locating the property is the biggest hurdle. We use a variation of this model by buying under valued properties and adding value to them by renovating. To do so we buy the property with cash then after our renovations are complete we get the property appraised at the new value and place a mortgage on the property. We usually get all or most of our money out of the property. We may even sell the property to a Joint Venture Partner and keep 50% ownership of the investment. As I said locating properties that you can do this takes patience and it is the biggest hurdle.

 

[JimWhitelaw]

[quote user=invst4profit]She is selling a dream and in doing so it is always common to entice the dreamers with tales of exploits beyond the norm. Sure, but as long as you have a really powerful emotional reason for doing this (unless the reason is to make money, that one is taboo), everything else will magically work itself out. Anyone who doubts this is just a dirty dream-stealer. Â

 

[housingrental]

Great post Jim!



I can also assume many readers want to know what your emotional reason is investing to better help them find their personal reason!



Thanks in advance for your detailed response



[quote user=JimWhitelaw][quote user=invst4profit]She is selling a dream and in doing so it is always common to entice the dreamers with tales of exploits beyond the norm. Sure, but as long as you have a really powerful emotional reason for doing this (unless the reason is to make money, that one is taboo), everything else will magically work itself out. Anyone who doubts this is just a dirty dream-stealer. Â

 

[TangoWhiskey]

[quote user=ThomasBeyer][quote user=ClintL]She made no mention of raising rents or any renos.
a 4-plex is evaluted on RENTS .. rents don't go up by magic. They go up because the market and the property supports it. Thus, to get rents up you usually have to upgrade them. Sometimes you get lucky and you get a dumb seller. But that is not a reliable business strategy as sellers of revenue properties, on balance, are not so dumb. Yes, there is the odd one. If you strike 12 times you will find 1-2. But not consistently.



Ask her: why did the properties appraise higher ?


Thomas' estimate of 1 or 2 in 12 sellers being dumb enough to leave money (sometime a LOT of money) on the table is a great one - this example of Savannah Ross is possible but very improbable on a short time frame. Usually where you find sellers leaving big sums on the table you have to do a lot of renos to bring units up to conditions worth market rent as old tenants leave. In itself that takes a big chunk of time to close the building, make the changes, then realise the higher value with a re-fi, not to mention familiarity with the market and asset type and location and tenant pool. She would also need a crystal ball to avoid high transaction costs with her frequent re-fi's. Big time artistic license to enhance the guru status on the face of it.



You can use systems to increase the ratio of 1 or 2 in 12 sellers leaving money on the table for you to make her example a more realistic one but you then need to really broaden your geographic base or the asset types you're looking at and be marketing to enough sellers off-market that you have sufficient deal flow to only concentrate on the ones leaving big $$ on the table. In itself this kind of a marketing system is expensive to begin and maintain and is a full-time job at least initially (take my word for it). You also need to know a market well to do this or you need to be able to go into communities you don't know well and accurately assess the likelihood of there being big $$ on the table and how and if you can accomplish that. The best returns on time invested mean targeting 6 figure amounts doing multi-fam or commercial property value plays. OTOH 6 figure profit in deals means you don't need to execute on many to make big money.



There's little chance that the presenter is doing this on such casual presentations.

 

[reinvestors88]

[quote user=TerryKruse]It sounds like a great way to sell courses.



Terry



I fully agree with Terry unless it is tested in Canada RE and banks.

 

[Ferdz]

I decided to sign up to this forum and give my testimonial ..



i went to her free seminar early this year in Toronto and i really regret it because i sign up for the course.

i spend almost CAD 7000 - they are gone.



i started listening to her course (online) and send her questions but hardly received a reply.



few weeks ago i received email from her mentioned she will retire from real estate ??

does it make sense to all of you..retire..? i am agree with what Julie mentioned in her book

REI is "cash for tomorrow" ..to become full time investor you have to have "cash for today" which you can get it from rent-to-own. Me - have one rental property and work fulltime and i know i can not leave off of rental income ..for sure, but in the next 10 year those property will give an awesome cash.



lately i dig out more about Julie Broad and Dave (Revnyou.com) and actually i have been subscribed to their newsletter back years ago, and i met them in a meeting few months ago..i can see they are a real REI and i bought their book "more than a cash flow" too.

for you who have not known them here is the link She was interviewed by CTV news this month:

http://bc.ctvnews.ca/video?clipId=1017226&binId=1.1184756&playlistPageNum=1&inf_contact_key=06291f97dec48356a39c6ef0d446bc525131f24caa863930e830bed01f080c85



I highly recommend them to people who want to invest in property..



one more thing until today i have not met with one of successful student of Rich Mom savannah ross LOL.

I was hoping to see some of her students last month ..but the meeting in Toronto was cancelled ..



one advice is: when attend to this kind of seminar please do not sign up or register for the course yet but ask the speaker to give you a reference of their successful student .. you need a proof / evidence before decide to join.



Thanks

 

[ShannonMurree]

Well Clint, you've come a long way yourself since this post in February 2012. What have you learned so far and what can you share?



Totally agree about Julie and Dave - they are the real deal.

 

[ClintL]

Jeepers, what have I learned so far? Here are some things that come into mind;



- solid real estate investing is NOT brain surgery, just a lot of common sense and careful planning

- I should have doubled the allowance for initial and first year renovations/maintenance

- be prepared for tenant turnover if renting to echo boomers - many have no concept of credit and prone to breaking leases - fortunately being in a low vacancy area can somewhat offset this

- trades people are not always reliable - even referred ones - keep collecting contacts to replace those on your team who are no longer reliable

- don't try to do own renos to save money if you suck at it, ie., have minimal actual reno skills

- when inheriting tenants, try to find out from neighbours, etc., what they are really like as opposed to just meeting these tenants in person

- if buying a property with illegal units, have a contingency plan in the event of city involvement and include this plan as part of the financial anaylsis - better yet, stick to legal units



Clint